Fox says considering default on 38 Studio bonds is “an option”

Oct 22, 2012

Governor Lincoln Chafee has said he won’t even consider defaulting on the bonds for 38 Studios, and state Treasurer Gina Raimondo says the state should honor the bonds.

But House Speaker Gordon Fox has more influence over the budget process than either of them, and he isn’t dismissing the idea of considering defaulting on the 38 Studio bonds. “It’s an option,” Fox said when asked about the subject last week near the end of a debate on WPRI/WNAC-TV’s Newsmakers.

UPDATE: Fox’s legislative opponent, Mark Binder, is questioning whether Fox modified his stance on considering default. According to a news release from Binder’s campaign late Monday:

Binder said Fox told Moody’s Investors service something very different last May.  At that time, Moody’s investment analyst Marcia Van Wagner issued an investment note which stated, “Governor Chafee, Treasurer Raimondo, Senate President Teresa Paiva-Weed and House Speaker Gordon Fox have recently expressed to us directly their support for the moral obligation commitment based on the state’s credit.” . . . .

Binder added, “Gordon Fox owes taxpayers a full explanation as to where he stands on the 38 Studios bonds and whether he thinks taxpayers should be on the hook for $100M in order to pay off the bondholders in this failed company with interest.  Why should they be made whole at the expense of taxpayers?”

Fox’s campaign couldn’t be immediately reached for additional comment. When asked on Newsmakers, Binder said he supports considering defaulting on the bonds for 38 Studios.

Josh Barro has argued emphatically that Rhode Island should default on the bonds, as he wrote in the Boston Globe in May.

Generally, states should perform on their moral obligations. But Rhode Island’s government has more moral obligations than it can possibly service. The state still struggles under a huge unfunded public employee pension obligation, even after a major set of pension reforms last year, which will freeze cost of living adjustments for current retirees for as long as 15 years.

Surely, the state had a moral obligation to pay those pension benefits in full. If it couldn’t afford to meet that obligation, how can it afford to appropriate the nearly $100 million that it will take to pay off the 38 Studios bondholders with interest? A default will surely make it difficult for Rhode Island to issue more moral obligation bonds— but if that means no more 38 Studios-style deals, so much the better.

Those on the other side of the argument believe that default would have a negative effect on Rhode Island.